Perpetual Inventory:Freight Costs (FOB Shipping Point)

Brian Krogol
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Well, goods don't just magically appear in our warehouse, right? There's gonna be some sort of delivery costs to get them there. Let's see how the delivery can affect our inventory. All right? So, someone's gonna have to pay for the shipping cost, right? There's gonna be either the buyer or the seller. Someone's gonna have to pay for it. Right? So these freight costs, we call them freight costs here, in in in the accounting class, and that's just the delivery expense. We call them freight costs. Cool. So, we're gonna have two types of situations when we're dealing with freight. The first one is called F. O. B. Shipping point, F. O. B. Stands for free on board. Okay? You don't really need to know that so much, but it's free on board shipping point. Okay? And this all deals with ownership of the goods who owns the goods during the delivery. Okay? So in this case, in a shipping point notice, it says F. O. B. Shipping point, will the ownership of the goods changes hands at the shipping point? So, this means before it gets onto the delivery truck, it changes hands to the other person, Right? So let's see what this means. So, in this case, when the ownership changes hands at the shipping point, well, the buyer pays the shipping cost right, because they own it during the shipment, right? The ownership changed hands right before it was given to the delivery guy, and now it's the buyer who has to pay to put it on the truck and get it to the warehouse. So, if you have to pay freight cost to receive your inventory. So if you're the one who's receiving inventory and you're in the situation, well the delivery cost is included in inventory. Okay So this isn't gonna just be some sort of delivery expense. We're actually gonna, what we say capitalize it to the inventory account and when we say capitalize something, oh we're gonna capitalize this. That means we're just gonna turn it into an asset. Okay? So in this case it's gonna turn into inventory value. Cool so let's see what this says. T. O. S. Ordered 500 things at $5 per thing. The terms of the order, our F. O. B. Shipping point ups charge $35 for the delivery of these things. Okay So the first thing we want to think about is who owns the goods during transit, right? And this is a shipping point, right? So if we imagine there's gonna be the in the in this shipping point we're gonna have the seller's warehouse, then we're gonna have the delivery and then the buyer's warehouse over here, right? So at the F. O. B. Shipping point this is where it changes hands right here, it's changing hands right here where it leaves the seller and before it gets onto the delivery truck. So that means the seller no longer owns it and the buyer owns it. So the buyer has to pay the shipping cost. Okay So in this case we are the buyer So we have to pay the shipping cost. So the first entry we're gonna make is the entry for the 500 things at $5 per thing, right? 500 things at $5 per thing. That's 500 times five. That comes out to 2500. Right? So we're gonna make an inventory entry to increase that. So we have debit to our inventory for 2500 to increase its value. And we're gonna credit, let's say accounts payable. It didn't tell us if we paid in cash or not. So let's just say it's accounts payable in this situation. It didn't really tell us it's not a big deal for this question. Okay. So this tells us that we owe 2500 for this inventory we received, but we also have to make one more entry for this shipping cost, right? We paid a shipping cost to ups and that was $35. This $35 is gonna increase the value of our inventory. The idea of this basically behind it is we couldn't receive this inventory. If we didn't pay this $35, right? If we if we said, Hey, we're not paying that delivery fee, well then we're not getting the inventory so we have to pay this delivery fee. If we want the inventory. So it's part of the inventory cost. That's kind of the logic going on here. So what's gonna happen is we're going to debit inventory for the $35 And we're going to credit cash or accounts payable depending on how we pay it. Let's say accounts payable again, that we're gonna go this $35 to ups. Okay, So this is the the entry for the shipping cost, notice it increased the value of our inventory, so now each unit instead of being worth $55 per thing is gonna be worth a little more, right, because we have to take the shipping cost and spread it out through all these units. So we would have an inventory value. After this inventory Went up by 2500 and then inventory went up again by 35. Right, so now our total value in inventory is gonna be the 25 35 Right? So if we're gonna show our balance sheet, it would show inventory with a value of 25 35. And in this case we said that everything was accounts payable, so we had accounts payable of 2500, which is a liability and then the accounts payable to the shipping company for 35. So our our equation stays balanced here. Cool. Alright, let's pause here and then we'll discuss the other type of free on board shipping. Cool. Let's check it out